G3 Recap 2-16-11

Main Items:

  • US Core PPI rose to 1.6% YoY in Jan, vs 1.2% expected and 1.3% previously. Gains in the core measure was broad-based and points to building commodities inflation. The Headline measure printed 3.6% vs 3.5% expected and 4.0% previously.
  • FOMC minutes did not reveal any surprises. Forecasts were revised a bit better:
  • 2011 Core PCE now 1.0%-1.3% VS 0.9%-1.6%
  • 2011 UE now 8.8%-9.0% VS 8.9%-9.1% (remember this was before they saw the latest UE print)
  • 2011 Growth now 3.4%-3.9% VS 3.0%-3.6%
  • 2011 Headline PCE now 1.3%-1.7% VS 1.1%-1.7%
  • Charts:

US Building Permits declined to 562k, roughly as expected and vs 635k previously.

The BoE Inflation Report suggests upcoming hikes, as unchanged policy rates were projected to keep CPI above 2% in 2013. With market rate expectations, the projection is for CPI to remain broadly stable through mid 2011: The BoE also said that the growth outlook has worsened due to a weak Q4 and a “higher assumed bank rate,” although the downgrade is minimal:

Nikkei reports that the MoF is worried about further downgrades of Japanese debt. "We’ve been holding discussions with the Bank of Japan to be ready for any development," one Finance Ministry official said, noting that they have talked about a number of emergency measures. For example, if overseas investors start dumping JGBs, the ministry will ask the central bank to immediately increase purchases of the instruments.

An ICBC exec says that demand in China for physical gold and gold-related investments is growing at an "explosive" pace. ICBC sold about 7 million tonnes of physical gold in January this year, more than double the 15 tonnes of bullion sold in the whole of 2010, said Zhou Ming, deputy head of the bank’s precious metals department on Wednesday. Reuters

Overseas Data:

  • UK Claimant Count Rate was unchanged at 4.5% as expected, while the ILO Unemployment Rate was also unchanged at 7.9% as expected.


  • The Nikkei report on the MoF is worth noting. Japan has one way out of its mess – massive QE. That’s why the bulk of its macro adjustment will occur via JPY devaluation rather than a massive sell off in JGB’s. The BoJ, as an pseudo-agent of the MoF, will have no choice but to intervene given that a huge chunk of Japanese savings are sitting in JGB’s.
    However, the path is likely to be choppy – the initial move up in JGB yields is likely may cause the Yen to strengthen first, as it represents a defacto tightening of monetary policy and it spurs repatriation. Furthermore, the BoJ will probably take time to act, hoping for things to stabilize, and creating window where the moves are sharp. In either case, volatility is likely to move sharply higher.
  • More details on the BAML survey mentioned on yesterday’s recap:
    The survey showed cash balances at 3.5%. Historical equity moves after prints below 3.6%:

    Equity Bullishness are at levels consistent with a pause in the rally:

    Investors were also the most underweight bonds since April 2006:

    Finally, US vs EM is now without a doubt a consensus trade: